Investors are always searching for investing opportunities, both in publicly listed and private companies. There are interesting private companies, except that it is a challenge to get a piece of them. So, you have to wait for the Initial Public Offering (IPO). Companies sell shares to the public to raise funds; they use these funds to grow the business, or to pay debt, it is a more complicated than this but you get the picture.
A handful of smart people work collectively to get the company listed in the securities exchange. This often include company founders, management, investment bankers, and other advisors. These people disagree on a number of things but the focal point of this Blog is the value of the business; from a trading perspective, the listing price.
- The founders want a fair price for their business. They will not settle for anything less that what they perceive to be the value of their brainchild. They will fight tooth and nail to get the highest possible price.
- Investment bankers want to seal the deal and get their fat paycheck. They will push founders to accept reasonable value just to close the deal.
Obviously the numbers do not fall from the sky, they are based on valuations. Subjective valuations; what is the price of goodwill anyway? Eventually they come up with a number, and they notify the public about the listing price.
Cue madness. Other smart guys start number crunching to assess if the proposed number is indeed a fair price. Again, arguments ensue but who cares? The founders have already calculated their loot and chose the colour of their Lamborghini, I will buy an Audi R8 when my company go public. Investment bankers are ready with their invoice.
It is the retail investor who is about to be shafted. Sharp investors will have done their due diligence, but everything is subjective so they are mostly wrong despite their efforts. Lazy investors are ready to buy the hype, they rarely care about the numbers, they just want to own the good company.
I used to like IPOs until I read Shoe Dog by Phil Knight (free on Amazon with Audible Plus trial, check the banner on the left hand side of this Blog to sign up). Phil disagreed with the evaluators on Nike's listing price. He was adamant that Nike is worth at least $22/share; he got his price, and just like that he was a millionaire, he deserved it, he built a great business!
Ever since I read this book I stopped buying IPOs, or anything that has just started trading like SAB Zenzele Kabili shares, check what #fintwit is saying about it below. I cannot guesstimate the fair value of the company or the fair price of the stock. I also know that going public is an exit strategy for founders, that is where they make most money by selling some of their equity. As the new investor you are just starting your journey with the company and hoping for great times ahead.
The share structure is often complex, the founders can sell a large chuck of their equity but still retain control through complex share structure. But ke, I trade stocks for other reasons not to control publicly listed companies. I now wait for the market, buyers and sellers, to vote on the fair share price. I also want the stock to have a bit of a trading history so I can look at price action and plan my trade.
Are IPOs bad?
No, you need to understand what are they and their implications, and if buying IPO is part of your investing/trading, by all means, do it. Be aware that the trading price can be out of sync with the listing price or the fair value, SAB Zenzele Kabili quadrupled in under two weeks, but other IPOs have tanked few minutes after listing. Anything is possible with IPOs!
Always do your due diligence before investing in anything.
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